The chief executive of
NIB
,
Mark Fitzgibbon,
has written to Health Minister
Peter Dutton
claiming a policy that forces health funds to subsidise the costs of other insurers’ most expensive members drives up prices and discourages young people from signing up.

Mr Fitzgibbon wants a “sensible ­discussion" on risk equalisation, which partially compensates health funds for the hospital costs of high risk patients. It supports “community rating", which means funds can’t price their policies based on risks such as age and pre-existing conditions. Equalisation shares a proportion of costs for members aged 55 years and older on a sliding scale with the industry. Funds pay a share based on the size of their membership.

NIB would be significantly more profitable without risk equalisation. In the first half of 2013-14 it paid ­$101 million to the shared pool. It had net profit of $40 million in the half. The reason NIB has a high liability, and doesn’t receive money back, is a result of its younger membership. NIB customers are aged an average 37 years, compared to 40.5 years across the industry, Mr Fitzgibbon said.

He conceded some ­self-interest, but he said the system was a problem for the industry and government. He said it was a significant driver of premium increases and removed the incentive to sign up younger people. NIB’s 2014 ­premium increase of 7.99 per cent was the highest in the industry. Mr ­Fitzgibbon said for every year the ­average age is reduced, per capita claims could be reduced by 3 per cent.

Controlling costs

Scrapping equalisation would force funds to take a more active role in preventative care to avoid claims, he said, adding some smaller funds propped up by the system would collapse.

He said one compromise he could accept would be to make equalisation payments prospective, instead of retrospective. That way if insurers were expecting a certain amount, it would provide an incentive to control costs and pocket the difference. Such a ­system exists in Switzerland, he said.

Mr Fitzgibbon said funds could ­manage risk by having a spread of ages in their membership. But Nomura ­analyst Toby Langley said funds that skewed older, could “take a generation to sort out" their book.

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The industry regulator is set to begin consultation investigating if risk equalisation impairs pricing competition and protects consumers. Mr Langley said although risk ­equalisation had a touch of “Robin Hood" about it, change was unlikely. “It’s likely to remain a sensitive subject. There are too many ideological questions to really make much progress.

"Some smaller funds might be unsustainable without risk equalisation, but he said NIB was the only fund with a motive to satisfy public ­shareholders. “NIB is in the minority in terms of the need to run itself in a more efficient way because it has more stakeholders looking over its shoulder," he said. “However, it’s also not in the interest of the broader public to pay more just because the PHI [private health insurance] system itself is inefficient."